The latest issue brief from the Center for Retirement Research on Social Security’s 2010 Trustees Report doesn’t contain many surprises. Social Security is not doing well, and costs will eventually exceed income. However, as Alicia Munnell, director for the Center, notes in the September brief, “the fact that the future of Social Security has been relatively untouched by the market collapse and ensuing recession is itself newsworthy.”
According to the brief, the Social Security cost rate has stayed below the income rate for the past two decades, and Social Security has enjoyed cash flow surpluses as a result of reforms enacted in 1983. It wasn’t until the increase in unemployment and subsequent decrease in payroll taxes, coupled with increasing benefit claims that the cost rate surpassed income. Furthermore, the cost rate should stay below the income rate from 2012 to 2014.
Beyond 2014, though, Social Security will have to “regularly tap the interest on trust fund assets to cover benefits,” and in 2025 the government will have to begin drawing on trust fund assets to cover benefits. Finally, in 2037, the trust fund will be exhausted.
What will happen in 2037?
“Some commentators describe the program as ‘bankrupt,’ leaving the impression that Social Security has no money at all. But payroll tax revenues continue rolling in. So the system will still have enough revenue to pay 78 percent of currently legislated benefits after exhaustion of reserves in 2037,” Munnell writes. This means that the retirees of 2037 will receive just 29% of their pre-retirement earnings when they claim Social Security benefits, as opposed to 36%.
One possible solution suggested by Munnell is to raise the payroll taxes 1.92% – the projected deficit over the next 75 years – or 0.96% for employees and employers. This would cover the current benefits package for everyone who reaches retirement age through 2086, according to the brief.
More permanent fixes have to look beyond the next 75 years, however, and Munnell says, very definitively “There is no silver bullet.” The government will have to either cut benefits or raise Social Security income.